Chart of the Month: December 2013

Will the next major trend in the economy be inflationary or disinflationary? The commodity futures markets are on the verge of giving us a strong signal.

The Continuous Commodity Index (CCI) is an equal-weight basket of 17 commodity futures, including energy, agriculture, softs, and metals. The index has taken on different names over the years, but its underlying composition has been unchanged since 1957. As such, the CCI is the cleanest commodity index – it doesn’t get tinkered with for purposes of re-weighting and doesn’t skew toward any one commodity or sector that happens to be hot.

The CCI has been consolidating in a huge triangle formation since reaching a cyclical high in 2011.

Prices are nearing the apex of the triangle and can be expected to soon break strongly either to the upside or the downside. An upside breakout would imply higher precious metals prices and higher rates of consumer price inflation in the months ahead. A break below the 500 level would imply dis-inflation and the potential for deflationary pressures to assert themselves.

We don’t think a Janet Yellen Federal Reserve will tolerate deflation. Therefore, any deflation scare would likely be brief and ultimately resolve in inflation. But at the moment the forces of inflation and deflation are battling each other to a stalemate. We’ll keep a close eye on commodity prices and update you in these pages when we see a major trend change developing – which obviously will carry important implications for resource investments.